Use the Information for the Question(s)below

question 31

Multiple Choice

Use the information for the question(s) below.
You own a small manufacturing plant that currently generates revenues of $2 million per year.Next year,based upon a decision on a long-term government contract,your revenues will either increase by 20% or decrease by 25%,with equal probability,and stay at that level as long as you operate the plant.Other costs run $1.6 million per year.You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital is 10%.
-Given the embedded option to sell the plant,the value of your plant will be closest to:

• A)$5.0 million.
• B)$4.0 million.
• C)$6.5 million.
• D)$8.0 million.

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Definitions:

FICA-OASDI Tax

Federal Insurance Contributions Act - Old Age, Survivors, and Disability Insurance tax; a payroll tax that funds Social Security and Medicare in the United States.

FICA-Medicare Tax

A payroll tax deducted from employee wages and paid by both employees and employers to fund Medicare.

Federal Income Tax

A tax levied by the federal government on yearly income earned by individuals, businesses, and other organizations.

Workers' Compensation

An insurance program that provides benefits to employees who suffer job-related injuries or illnesses.